CAD Undervalued as Rally Stalls

According to Scotiabank strategists Shaun Osborne and Eric Theoret, the Canadian Dollar (CAD) is trading flat against the US Dollar (USD) and lagging behind most G10 peers. They note that wider US-Canada yield spreads have been weighing on the CAD, but see this move as stretched.

The pair's fair value estimate for USD/CAD stands at 1.4055, suggesting the Canadian Dollar is marginally undervalued at current spot levels in the mid-1.41s. This implies that the CAD could be due for a potential rally.

However, Osborne and Theoret caution that the rally in USD/CAD has been impressive, with nearly unbroken daily gains since July 9th. They also highlight that momentum is already in overbought territory, as indicated by an RSI of 72. This suggests that further gains may be limited.